HOME BANCSHARES INC - Quarter Report: 2011 September (Form 10-Q)

HOME BANCSHARES, INC.
FORM 10-Q
September 30, 2011

INDEX

		Page No.
Part I: Financial Information			4
Item 1. Financial Statements			4
Consolidated Balance Sheets — September 30, 2011 (Unaudited) and December 31, 2010			4
Consolidated Statements of Income (Unaudited) — Three and nine months ended September 30, 2011 and 2010			5
Consolidated Statements of Stockholders’ Equity (Unaudited) — Nine months ended September 30, 2011 and 2010			6-7
Consolidated Statements of Cash Flows (Unaudited) — Nine months ended September 30, 2011 and 2010			8
Condensed Notes to Consolidated Financial Statements (Unaudited)			9-35
Report of Independent Registered Public Accounting Firm			36
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37-71
Item 3. Quantitative and Qualitative Disclosures About Market Risk			71-73
Item 4. Controls and Procedures			74
Part II: Other Information
Item 1. Legal Proceedings			74
Item1A. Risk Factors			74
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			74
Item 3. Defaults Upon Senior Securities			74
Item 4. (Reserved)			74
Item 5. Other Information			75
Item 6. Exhibits			75
Signatures			76
EX-12.1
EX-15
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Exhibit List
12.1		Computation of Ratios of Earnings to Fixed Charges
15		Awareness of Independent Registered Public Accounting Firm
31.1		CEO Certification Pursuant to 13a-14(a)/15d-14(a)
31.2		CFO Certification Pursuant to 13a-14(a)/15d-14(a)
32.1		CEO Certification Pursuant to 18 U.S.C. Section 1350
32.2		CFO Certification Pursuant to 18 U.S.C. Section 1350
101		XBRL Documents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Some of our statements contained in this document, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operation” are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to future events or our future financial performance and include statements about the competitiveness of the banking industry, potential regulatory obligations, our entrance and expansion into other markets, our other business strategies and other statements that are not historical facts. Forward-looking statements are not guarantees of performance or results. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “predict,” “estimate,” “could,” “should,” “would,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. These forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions, and on the information available to us at the time that these disclosures were prepared. These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, but not limited to, the following:

	•		the effects of future economic conditions, including inflation or a continued decrease in commercial real estate and residential housing values;
	•		governmental monetary and fiscal policies, as well as legislative and regulatory changes;
	•		the impact of the recently enacted Dodd-Frank financial regulatory reform act and regulations to be issued thereunder;
	•		the risks of changes in interest rates or the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities;
	•		the effects of terrorism and efforts to combat it;
	•		credit risks;
	•		the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with competitors offering banking products and services by mail, telephone and the Internet;
	•		the effect of any mergers, acquisitions or other transactions to which we or our subsidiaries may from time to time be a party, including our ability to successfully integrate any businesses that we acquire;
	•		the failure of assumptions underlying the establishment of our allowance for loan losses; and
	•		the failure of assumptions underlying the estimates of the fair values for our covered assets and FDIC indemnification receivable.

     All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this Cautionary Note. Our actual results may differ significantly from those we discuss in these forward-looking statements. For other factors, risks and uncertainties that could cause our actual results to differ materially from estimates and projections contained in these forward-looking statements, see the “Risk Factors” section of our Form 10-K filed with the Securities and Exchange Commission on March 10, 2011.

PART I: FINANCIAL INFORMATION

Item 1: Financial Statements

Home BancShares, Inc.

		September 30,				December 31,
(In thousands, except share data)		2011				2010
		(Unaudited)
Assets
Cash and due from banks		$	48,748			$	49,927
Interest-bearing deposits with other banks			104,053				237,605
Cash and cash equivalents			152,801				287,532
Federal funds sold			3,670				27,848
Investment securities — available for sale			610,522				469,864
Loans receivable not covered by loss share			1,826,373				1,892,374
Loans receivable covered by FDIC loss share			511,326				575,776
Allowance for loan losses			(54,508	)			(53,348	)
Loans receivable, net			2,283,191				2,414,802
Bank premises and equipment, net			89,894				81,939
Foreclosed assets held for sale not covered by loss share			16,541				11,626
Foreclosed assets held for sale covered by FDIC loss share			32,183				21,568
FDIC indemnification asset			201,211				227,258
Cash value of life insurance			52,422				51,970
Accrued interest receivable			15,038				16,176
Deferred tax asset, net			21,998				18,586
Goodwill			59,663				59,663
Core deposit and other intangibles			9,325				11,447
Other assets			73,707				62,367
Total assets		$	3,622,166			$	3,762,646
Liabilities and Stockholders’ Equity
Deposits:
Demand and non-interest-bearing		$	479,512			$	392,622
Savings and interest-bearing transaction accounts			1,143,335				1,108,309
Time deposits			1,262,202				1,460,867
Total deposits			2,885,049				2,961,798
Securities sold under agreements to repurchase			62,407				74,459
FHLB borrowed funds			142,901				177,270
Accrued interest payable and other liabilities			24,339				27,863
Subordinated debentures			44,331				44,331
Total liabilities			3,159,027				3,285,721
Stockholders’ equity:
Preferred stock; $0.01 par value; 5,500,000 shares authorized:
Series A fixed rate cumulative perpetual; liquidation preference of $1,000 per share; zero shares issued or outstanding at September 30, 2011; 50,000 shares issued and outstanding at December 31, 2010.			—				49,456
Common stock, par value $0.01; shares authorized 50,000,000; shares issued and outstanding 28,259,044 in 2011 and 28,452,411 in 2010			283				285
Capital surplus			425,852				432,962
Retained earnings (deficit)			28,218				(6,079	)
Accumulated other comprehensive income			8,786				301
Total stockholders’ equity			463,139				476,925
Total liabilities and stockholders’ equity		$	3,622,166			$	3,762,646

See Condensed Notes to Consolidated Financial Statements. 4

Home BancShares, Inc.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(In thousands, except per share data)		2011				2010				2011				2010
						(Unaudited)
Interest income:
Loans		$	39,199			$	35,673			$	117,844			$	98,675
Investment securities
Taxable			2,429				1,802				6,793				5,364
Tax-exempt			1,546				1,492				4,617				4,471
Deposits — other banks			84				92				331				258
Federal funds sold			1				3				9				13
Total interest income			43,259				39,062				129,594				108,781
Interest expense:
Interest on deposits			5,638				6,319				17,884				17,486
FHLB borrowed funds			1,250				1,854				3,768				6,113
Securities sold under agreements to repurchase			120				137				384				349
Subordinated debentures			539				599				1,620				1,796
Total interest expense			7,547				8,909				23,656				25,744
Net interest income			35,712				30,153				105,938				83,037
Provision for loan losses			—				3,000				1,250				9,850
Net interest income after provision for loan losses			35,712				27,153				104,688				73,187
Non-interest income:
Service charges on deposit accounts			3,638				3,551				10,428				10,275
Other service charges and fees			2,489				1,816				7,375				5,353
Mortgage lending income			783				760				2,089				1,822
Mortgage servicing income			—				—				—				314
Insurance commissions			428				248				1,505				904
Income from title services			126				98				327				353
Increase in cash value of life insurance			323				330				849				1,106
Dividends from FHLB, FRB & bankers’ bank			184				151				506				419
Gain on acquisitions			—				—				—				9,334
Gain on sale of SBA loans			—				—				259				18
Gain (loss) on sale of premises and equipment, net			6				2				79				221
Gain (loss) on OREO, net			69				(1,063	)			(1,032	)			(1,308	)
Gain (loss) on securities, net			5				(37	)			5				(37	)
FDIC indemnification asset			1,314				1,895				4,614				2,631
Other income			595				556				2,123				1,767
Total non-interest income			9,960				8,307				29,127				33,172
Non-interest expense:
Salaries and employee benefits			10,691				9,637				32,449				27,251
Occupancy and equipment			3,562				3,264				10,923				9,036
Data processing expense			1,185				848				3,607				2,664
Other operating expenses			8,298				7,545				24,474				19,888
Total non-interest expense			23,736				21,294				71,453				58,839
Income before income taxes			21,936				14,166				62,362				47,520
Income tax expense			7,624				4,606				21,788				16,122
Net income available to all stockholders			14,312				9,560				40,574				31,398
Preferred stock dividends and accretion of discount on preferred stock			488				670				1,828				2,010
Net income available to common stockholders		$	13,824			$	8,890			$	38,746			$	29,388
Basic earnings per common share		$	0.48			$	0.32			$	1.36			$	1.04
Diluted earnings per common share		$	0.48			$	0.31			$	1.35			$	1.03

See Condensed Notes to Consolidated Financial Statements. 5

Home BancShares, Inc.

Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2011 and 2010

																		Accumulated
														Retained				Other
														Earnings				Comprehensive
(In thousands, except share data)		Preferred Stock				Common Stock				Capital Surplus				(Deficit)				Income (Loss)				Total
Balance at January 1, 2010		$	49,275			$	257			$	363,519			$	51,746			$	176			$	464,973
Comprehensive income:
Net income			—				—				—				31,398				—				31,398
Other comprehensive income:
Unrealized gain on investment securities available for sale, net of tax effect of $3,872			—				—				—				—				5,995				5,995
Comprehensive income																							37,393
Accretion of discount on preferred stock			136				—				—				(136	)			—				—
Net issuance of 156,069 shares of common stock from exercise of stock options			—				2				1,411				—				—				1,413
Disgorgement of profits			—				—				11				—				—				11
Tax benefit from stock options exercised			—				—				863				—				—				863
Share-based compensation			—				—				324				—				—				324
Cash dividend — Preferred Stock - 5%			—				—				—				(1,875	)			—				(1,875	)
Cash dividends — Common Stock, $0.1625 per share			—				—				—				(4,623	)			—				(4,623	)
Stock dividend — Common Stock — 10%			—				25				66,540				(66,576	)			—				(11	)
Balances at September 30, 2010 (unaudited)			49,411				284				432,668				9,934				6,171				498,468
Comprehensive income:
Net income			—				—				—				(13,807	)			—				(13,807	)
Other comprehensive income:
Unrealized loss on investment securities available for sale, net of tax effect of $(3,792)			—				—				—				—				(5,870	)			(5,870	)
Comprehensive income																							(19,677	)
Accretion of discount on preferred stock			45				—				—				(45	)			—				—
Net issuance of 18,829 shares of common stock from exercise of stock options			—				1				141				—				—				142
Tax benefit from stock options exercised			—				—				101				—				—				101
Share-based compensation			—				—				52				—				—				52
Cash dividends — Preferred stock - 5%			—				—				—				(625	)			—				(625	)
Cash dividends — Common Stock, $0.054 per share			—				—				—				(1,536	)			—				(1,536	)
Balances at December 31, 2010			49,456				285				432,962				(6,079	)			301				476,925

See Condensed Notes to Consolidated Financial Statements. 6

Home BancShares, Inc.
Consolidated Statements of Stockholders’ Equity — Continued
Nine Months Ended September 30, 2011 and 2010

																		Accumulated
														Retained				Other
														Earnings				Comprehensive
(In thousands, except share data)	Preferred Stock					Common Stock				Capital Surplus				(Deficit)				Income (Loss)				Total
Comprehensive income:
Net income			—				—				—				40,574				—				40,574
Other comprehensive income:
Unrealized gain on investment securities available for sale, net of tax effect of $5,478			—				—				—				—				8,485				8,485
Comprehensive income																							49,059
Repurchase of 50,000 shares of preferred stock and common stock warrant			(50,000	)			—				(2,206	)			906				—				(51,300	)
Accretion of discount on preferred stock			544				—				—				(544	)			—				—
Net issuance of 24,477 shares of common stock from exercise of stock options			—				—				227				—				—				227
Repurchase of common stock			—				(2	)			(5,542	)			—				—				(5,544	)
Tax benefit from stock options exercised			—				—				126				—				—				126
Share-based compensation			—				—				285				—				—				285
Cash dividends — Preferred stock - 5%			—				—				—				(1,286	)			—				(1,286	)
Cash dividends — Common Stock, $0.188 per share			—				—				—				(5,353	)			—				(5,353	)
Balances at September 30, 2011 (unaudited)		$	—			$	283			$	425,852			$	28,218			$	8,786			$	463,139

See Condensed Notes to Consolidated Financial Statements. 7

Home BancShares, Inc.

		Period Ended September 30,
(In thousands)		2011				2010
		(Unaudited)
Operating Activities
Net income		$	40,574			$	31,398
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			4,943				3,945
Amortization/(accretion)			489				52
Share-based compensation			285				324
Tax benefits from stock options exercised			(126	)			(863	)
(Gain) loss on assets			645				969
Gain on acquisitions			—				(9,334	)
Provision for loan losses			1,250				9,850
Deferred income tax effect			(8,890	)			2,100
Increase in cash value of life insurance			(849	)			(1,106	)
Originations of mortgage loans held for sale			(82,239	)			(94,415	)
Proceeds from sales of mortgage loans held for sale			85,562				79,856
Changes in assets and liabilities:
Accrued interest receivable			1,138				(2,132	)
Other assets			19,326				9,913
Accrued interest payable and other liabilities			(3,398	)			5,397
Net cash provided by (used in) operating activities			58,710				35,954
Investing Activities
Net (increase) decrease in federal funds sold			24,178				14,039
Net (increase) decrease in loans net, excluding loans acquired			79,214				10,019
Purchases of investment securities — available for sale			(262,286	)			(113,721	)
Proceeds from maturities of investment securities — available for sale			132,044				107,855
Proceeds from sale of investment securities — available for sale			566				5,539
Proceeds from foreclosed assets held for sale			26,738				14,879
Proceeds from sale of SBA loans			4,524				268
Sale of mortgage servicing portfolio			—				225
Purchases of premises and equipment, net			(12,819	)			(7,722	)
Death benefits received			700				1,585
Net cash proceeds received in FDIC-assisted acquisitions			—				160,587
Net cash provided by (used in) investing activities			(7,141	)			193,553
Financing Activities
Net increase (decrease) in deposits, net of deposits acquired			(76,749	)			(90,829	)
Net increase (decrease) in securities sold under agreements to repurchase			(12,052	)			11,015
Net increase (decrease) in FHLB and other borrowed funds, net of acquired			(34,369	)			(107,642	)
Retirement of subordinated debentures			—				(3,252	)
Proceeds from exercise of stock options			227				1,413
Repurchase of common stock			(5,544	)			—
Repurchase of preferred stock and common stock warrant			(51,300	)			—
Disgorgement of profits			—				11
Tax benefits from stock options exercised			126				863
Dividends paid on preferred stock			(1,286	)			(1,875	)
Dividends paid on common stock			(5,353	)			(4,634	)
Net cash provided by (used in) financing activities			(186,300	)			(194,930	)
Net change in cash and cash equivalents			(134,731	)			34,577
Cash and cash equivalents — beginning of year			287,532				173,490
Cash and cash equivalents — end of period		$	152,801			$	208,067

See Condensed Notes to Consolidated Financial Statements. 8

Home BancShares, Inc.

(Unaudited)

1: Nature of Operations and Summary of Significant Accounting Policies

     Nature of Operations

     Home BancShares, Inc. (the Company or HBI) is a bank holding company headquartered in Conway, Arkansas. The Company is primarily engaged in providing a full range of banking services to individual and corporate customers through its wholly owned community bank subsidiary — Centennial Bank (the Bank). The Bank has locations in central Arkansas, north central Arkansas, southern Arkansas, the Florida Keys, central Florida, southwestern Florida and the Florida Panhandle. The Company is subject to competition from other financial institutions. The Company also is subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities.

     A summary of the significant accounting policies of the Company follows:

     Operating Segments

     Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Bank is the only significant subsidiary upon which management makes decisions regarding how to allocate resources and assess performance. Each of the branches of the Bank provide a group of similar community banking services, including such products and services as commercial, real estate and consumer loans, time deposits, checking and savings accounts. The individual bank branches have similar operating and economic characteristics. While the chief decision maker monitors the revenue streams of the various products, services and branch locations, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the community banking services and branch locations are considered by management to be aggregated into one reportable operating segment, community banking.

     Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

     Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of foreclosed assets, the valuations of covered loans and the related indemnification asset. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets, management obtains independent appraisals for significant properties.

     Principles of Consolidation

     The consolidated financial statements include the accounts of HBI and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

     Reclassifications

     Various items within the accompanying consolidated financial statements for previous years have been reclassified to provide more comparative information. These reclassifications had no effect on net income or stockholders’ equity.

     Loans Receivable Not Covered by Loss Share and Allowance for Loan Losses

     Loans receivable not covered by loss share that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge-offs, deferred fees or costs on originated loans. Interest income on loans is accrued over the term of the loans based on the principal balance outstanding. Loan origination fees and direct origination costs are capitalized and recognized as adjustments to yield on the related loans.

     The allowance for loan losses is established through a provision for loan losses charged against income. The allowance represents an amount that, in management’s judgment, will be adequate to absorb probable credit losses on existing loans that may become uncollectible and probable credit losses inherent in the remainder of the loan portfolio. The amounts of provisions to the allowance for loan losses are based on management’s analysis and evaluation of the loan portfolio for identification of problem credits, internal and external factors that may affect collectability, relevant credit exposure, particular risks inherent in different kinds of lending, current collateral values and other relevant factors.

     The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows, or collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Bank’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risking rating data.

     Loans considered impaired, under FASB ASC 310-10-35, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The aggregate amount of impairment of loans is utilized in evaluating the adequacy of the allowance for loan losses and amount of provisions thereto. Losses on impaired loans are charged against the allowance for loan losses when in the process of collection it appears likely that such losses will be realized. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the collection of interest is doubtful, or generally when loans are 90 days or more past due. When accrual of interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

     Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.

     Loans are placed on non-accrual status when management believes that the borrower’s financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful, or generally when loans are 90 days or more past due. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. Accrued interest related to non-accrual loans is generally charged against the allowance for loan losses when accrued in prior years and reversed from interest income if accrued in the current year. Interest income on non-accrual loans may be recognized to the extent cash payments are received, but payments received are usually applied to principal. Non-accrual loans are generally returned to accrual status when principal and interest payments are less than 90 days past due, the customer has made required payments for at least six months, and the Company reasonably expects to collect all principal and interest.

     Trouble Debt Restructurings

     The Company accounts for troubled debt restructurings (TDRs) using ASC Topic 310-40, Troubled Debt Restructurings by Creditors. Restructuring of a debt constitutes a troubled debt restructuring if the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Common concessions granted to borrowers include interest rate and/or term modifications. As a result, the Bank will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. All TDRs are considered to be impaired loans.

     A loan modification does not result in a TDR unless the borrower is in financial difficulty and a concession has been granted. In determining whether a concession has been granted, the Company takes into account the extent to which the nature and amount of any additional collateral or guarantees received as part of the modifications do not serve as adequate compensation for other terms of the restructuring. If the additional collateral or guarantees received adequately compensate the Company for the concessions granted, the loan is not classified as a TDR.

     Interim financial information

     The accompanying unaudited consolidated financial statements as of September 30, 2011 and 2010 have been prepared in condensed format, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

     The information furnished in these interim statements reflects all adjustments, which are, in the opinion of management, necessary for a fair statement of the results for each respective period presented. Such adjustments are of a normal recurring nature. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for any other quarter or for the full year. The interim financial information should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2010 Form 10-K, filed with the Securities and Exchange Commission.

     Earnings per Share

     Basic earnings per common share are computed based on the weighted average number of shares outstanding during each year. Diluted earnings per common share are computed using the weighted average common shares and all potential dilutive common shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per common share (EPS) for the three-month and nine-month periods ended September 30:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(In thousands)
Net income available to stockholders		$	13,824			$	8,890			$	38,746			$	29,388
Average shares outstanding			28,434				28,403				28,464				28,334
Effect of common stock options			199				241				201				246
Diluted shares outstanding			28,633				28,644				28,665				28,580
Basic earnings per common share		$	0.48			$	0.32			$	1.36			$	1.04
Diluted earnings per common share		$	0.48			$	0.31			$	1.35			$	1.03

2: Business Combinations

     Acquisition Old Southern Bank

     On March 12, 2010, Centennial Bank entered into a purchase and assumption agreement (Old Southern Agreement) with the FDIC, as receiver, pursuant to which Centennial Bank acquired certain assets and assumed substantially all of the deposits and certain liabilities of Old Southern Bank (Old Southern).

     Prior to the acquisition, Old Southern operated 7 banking centers in the Orlando, Florida metropolitan area. The Company has kept open all of these locations except for one location in downtown Orlando. Including the effects of purchase accounting adjustments, Centennial Bank acquired $342.6 million in assets and assumed approximately $328.5 million of the deposits of Old Southern. Additionally, Centennial Bank purchased covered loans with an estimated fair value of $179.1 million, $3.0 million of foreclosed assets and $30.4 million of investment securities.

     See Note 2 “Business Combinations” of Form 10-K filed with the Securities and Exchange Commission (SEC) in March 2011 for additional discussion related to the acquisition of Old Southern.

     Acquisition Key West Bank

     On March 26, 2010, Centennial Bank, entered into a purchase and assumption agreement (Key West Bank Agreement) with the FDIC, as receiver, pursuant to which Centennial Bank acquired certain assets and assumed substantially all of the deposits and certain liabilities of Key West Bank (Key West).

     Prior to the acquisition, Key West operated one banking center located in Key West, Florida. Including the effects of purchase accounting adjustments, Centennial Bank acquired $89.6 million in assets and assumed approximately $66.7 million of the deposits of Key West. Additionally, Centennial Bank purchased covered loans with an estimated fair value of $46.9 million, $5.7 million of foreclosed assets and assumed $20.0 million of FHLB advances.

     See Note 2 “Business Combinations” of Form 10-K filed with the SEC in March 2011 for additional discussion related to the acquisition of Key West.

     Acquisition Coastal Community Bank and Bayside Savings Bank

     On July 30, 2010, Centennial Bank entered into separate purchase and assumption agreements with the FDIC (collectively, the “Coastal-Bayside Agreements”), as receiver for each bank, pursuant to which Centennial Bank acquired the loans and certain assets and assumed the deposits and certain liabilities of Coastal Community Bank (Coastal) and Bayside Savings Bank (Bayside), respectively. These two institutions had been under common ownership of Coastal Community Investments, Inc.

     Prior to the acquisition, Coastal and Bayside operated 12 banking centers in the Florida Panhandle area. Including the effects of purchase accounting adjustments, Centennial Bank acquired $436.8 million in assets and assumed approximately $424.6 million of the deposits of Coastal and Bayside. Additionally, Centennial Bank purchased covered loans with an estimated fair value of $200.6 million, non-covered loans with an estimated fair value of $4.1 million, $9.6 million of foreclosed assets and $18.5 million of investment securities.

     See Note 2 “Business Combinations” of Form 10-K filed with the SEC in March 2011 for additional discussion related to the acquisition of Coastal and Bayside.

     Acquisition Wakulla Bank

     On October 1, 2010, Centennial Bank entered into a purchase and assumption agreement with the FDIC, as receiver, pursuant to which Centennial Bank acquired the performing loans and certain assets and assumed substantially all of the deposits and certain liabilities of Wakulla Bank (Wakulla).

     Prior to the acquisition, Wakulla operated 12 banking centers in the Florida Panhandle. Including the effects of purchase accounting adjustments, Centennial Bank acquired approximately $377.9 million in assets and assumed approximately $356.2 million in deposits of Wakulla. Additionally, Centennial Bank purchased performing covered loans of approximately $148.2 million, performing non-covered loans with an estimated fair value of $17.6 million, $45.9 million of marketable securities and $27.6 million of federal funds sold.

     See Note 2 “Business Combinations” of Form 10-K filed with the SEC in March 2011 for additional discussion related to the acquisition of Wakulla.

     Acquisition Gulf State Community Bank

     On November 19, 2010, Centennial Bank entered into a purchase and assumption agreement with the FDIC, as receiver, pursuant to which Centennial Bank acquired the loans and certain assets and assumed substantially all of the deposits and certain liabilities of Gulf State Community Bank (Gulf State).

     Prior to the acquisition, Gulf State operated 5 banking centers in the Florida Panhandle. Including the effects of purchase accounting adjustments, Centennial Bank acquired approximately $118.2 million in assets and assumed approximately $97.7 million in deposits of Gulf State. Additionally, Centennial Bank purchased covered loans with an estimated fair value of $41.2 million, non-covered loans with an estimated fair value of $1.7 million, $4.7 million of foreclosed assets and $10.8 million of investment securities.

     See Note 2 “Business Combinations” of Form 10-K filed with the SEC in March 2011 for additional discussion related to the acquisition of Gulf State.

     FDIC-Assisted Acquisitions — Other Matters

     The Company’s operating results for 2010, include the operating results of the acquired assets and assumed liabilities subsequent to the respective acquisition dates. Due to the significant fair value adjustments recorded, as well as the nature of the FDIC loss sharing agreements in place, historical results are not believed to be relevant to the Company’s results, and thus no pro forma information is presented.

     In an FDIC-assisted acquisition, we acquire certain assets and assume certain liabilities of the former institution under a loss share agreement with the FDIC. Any regulatory agreements or orders that existed for the former institution do not apply to the assuming institution. We, as the assuming institution, are evaluated separately by our regulators and any weaknesses of the former institution are considered in the separate evaluation. Also, the loss share agreement helps to mitigate any weaknesses that may have existed in the former institution.

3: Investment Securities

     The amortized cost and estimated market value of investment securities were as follows:

		September 30, 2011
		Available for Sale
						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				(Losses)				Estimated Fair Value
		(In thousands)
U.S. government-sponsored enterprises		$	295,765			$	4,085			$	(58	)		$	299,792
Mortgage-backed securities			125,974				4,323				(3	)			130,294
State and political subdivisions			160,035				6,190				(29	)			166,196
Other securities			14,291				—				(51	)			14,240
Total		$	596,065			$	14,598			$	(141	)		$	610,522

		December 31, 2010
		Available for Sale
						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				(Losses)				Estimated Fair Value
		(In thousands)
U.S. government-sponsored enterprises		$	198,248			$	977			$	(1,932	)		$	197,293
Mortgage-backed securities			113,557				2,820				(300	)			116,077
State and political subdivisions			154,706				1,458				(2,457	)			153,707
Other securities			2,858				—				(71	)			2,787
Total		$	469,369			$	5,255			$	(4,760	)		$	469,864

     Assets, principally investment securities, having a carrying value of approximately $370.4 million and $268.0 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Also, investment securities pledged as collateral for repurchase agreements totaled approximately $62.4 million and $74.5 million at September 30, 2011 and December 31, 2010, respectively.

     During the three-month and nine-month periods ended September 30, 2011 $561,000 of available for sale securities were sold. The gross realized gains on these sales totaled approximately $5,000. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.

     During the three-month and nine-month periods ended September 30, 2010 approximately $5.6 million of available for sale securities were sold. The gross realized gains and losses on these sales totaled approximately $34,000 and $1,000 respectively. The income tax expense/benefit to net security gains and losses was 39.225% of the gross amounts.

     The amortized cost and estimated fair value of securities at September 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Available-for-Sale
		Amortized				Estimated
		Cost				Fair Value
		(In thousands)
Due in one year or less		$	249,870			$	252,399
Due after one year through five years			247,072				253,423
Due after five years through ten years			74,110				78,419
Due after ten years			25,013				26,281
Total		$	596,065			$	610,522

     For purposes of the maturity tables, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on anticipated maturities. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

     The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. In completing these evaluations the Company follows the requirements of FASB ASC 320, Investments — Debt and Equity Securities. Certain investment securities are valued less than their historical cost. These declines are primarily the result of the rate for these investments yielding less than current market rates. Based on evaluation of available evidence, management believes the declines in fair value for these securities are temporary. The Company does not intend to sell or believe it will be required to sell these investments before recovery of their amortized cost bases, which may be maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

     During the three and nine month periods ended September 30, 2011, no securities were deemed to have other-than-temporary impairment besides securities for which impairment was taken in prior periods.

     For the period ended September 30, 2011, the Company had $42,000 in unrealized losses, which have been in continuous loss positions for more than twelve months. Excluding impairment write downs taken in prior periods, the Company’s assessments indicated that the cause of the market depreciation was primarily the change in interest rates and not the issuer’s financial condition, or downgrades by rating agencies. In addition, approximately 83.4% of the Company’s investment portfolio matures in five years or less. As a result, the Company has the ability and intent to hold such securities until maturity.

     The following shows gross unrealized losses and estimated fair value of investment securities available for sale, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position as of September 30, 2011 and December 31, 2010:

		September 30, 2011
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
U.S. government-sponsored enterprises		$	18,578			$	(40	)		$	2,058			$	(18	)		$	20,636			$	(58	)
Mortgage-backed securities			4,094				(3	)			—				—				4,094				(3	)
State and political subdivisions			960				(5	)			1,348				(24	)			2,308				(29	)
Other securities			9,761				(51	)			—				—				9,761				(51	)
Total		$	33,393			$	(99	)		$	3,406			$	(42	)		$	36,799			$	(141	)

		December 31, 2010
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
U.S. government-sponsored enterprises		$	126,862			$	(1,932	)		$	—			$	—			$	126,862			$	(1,932	)
Mortgage-backed securities			27,427				(300	)			—				—				27,427				(300	)
State and political subdivisions			57,272				(1,970	)			4,069				(487	)			61,341				(2,457	)
Other securities			—				—				2,667				(71	)			2,667				(71	)
Total		$	211,561			$	(4,202	)		$	6,736			$	(558	)		$	218,297			$	(4,760	)

4: Loans Receivable Not Covered by Loss Share and Allowance for Loan Losses

     The various categories of loans not covered by loss share are summarized as follows:

		September 30,				December 31,
		2011				2010
		(In thousands)
Real estate:
Commercial real estate loans
Non-farm/non-residential		$	744,749			$	805,635
Construction/land development			366,926				348,768
Agricultural			26,683				26,798
Residential real estate loans
Residential 1-4 family			353,110				371,381
Multifamily residential			59,974				59,319
Total real estate			1,551,442				1,611,901
Consumer			40,225				51,642
Commercial and industrial			170,695				184,014
Agricultural			35,238				16,549
Other			28,773				28,268
Loans receivable not covered by loss share		$	1,826,373			$	1,892,374

     The following tables present the balance in the allowance for loan losses for the three-month and nine-month periods ended September 30, 2011, and the allowance for loan losses and recorded investment in loans based on portfolio segment by impairment method as of September 30, 2011. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.

		Three Months Ended September 30, 2011
						Other
		Construction/				Commercial Real				Residential				Commercial				Consumer
		Land Development				Estate				Real Estate				& Industrial				& Other				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Beginning balance		$	11,318			$	19,141			$	14,324			$	7,119			$	2,450			$	2,432			$	56,784
Loans charged off			(3,166	)			(645	)			(1,778	)			(140	)			(641	)			—				(6,370	)
Recoveries of loans previously charged off			741				41				2,030				1,161				121				—				4,094
Net loans recovered (charged off)			(2,425	)			(604	)			252				1,021				(520	)			—				(2,276	)
Provision for loan losses			(850	)			4,258				(1,748	)			(1,704	)			62				(18	)			—
Balance, September 30		$	8,043			$	22,795			$	12,828			$	6,436			$	1,992			$	2,414			$	54,508

		Nine Months Ended September 30, 2011
						Other
		Construction/				Commercial Real				Residential				Commercial				Consumer
		Land Development				Estate				Real Estate				& Industrial				& Other				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Beginning balance		$	12,002			$	17,247			$	14,297			$	6,357			$	1,022			$	2,423			$	53,348
Loans charged off			(3,397	)			(665	)			(2,562	)			(292	)			(2,636	)			—				(9,552	)
Recoveries of loans previously charged off			747				204				2,278				5,777				456				—				9,462
Net loans recovered (charged off)			(2,650	)			(461	)			(284	)			5,485				(2,180	)			—				(90	)
Provision for loan losses			(1,309	)			6,009				(1,185	)			(5,406	)			3,150				(9	)			1,250
Balance, September 30		$	8,043			$	22,795			$	12,828			$	6,436			$	1,992			$	2,414			$	54,508

		As of September 30, 2011
						Other
		Construction/				Commercial Real				Residential				Commercial				Consumer
		Land Development				Estate				Real Estate				& Industrial				& Other				Unallocated				Total
Allowance for loan losses:
Period end amount allocated to:
Loans individually evaluated for impairment		$	4,301			$	17,174			$	8,981			$	3,510			$	918			$	—			$	34,884
Loans collectively evaluated for impairment			3,742				5,621				3,847				2,926				1,074				2,414				19,624
Balance, September 30		$	8,043			$	22,795			$	12,828			$	6,436			$	1,992			$	2,414			$	54,508
Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment		$	17,050			$	84,746			$	26,752			$	10,175			$	1,945			$	—			$	140,668
Loans collectively evaluated for impairment			349,876				686,686				386,332				160,520				102,291				—				1,685,705
Balance, September 30		$	366,926			$	771,432			$	413,084			$	170,695			$	104,236			$	—			$	1,826,373

     The following tables present the balance in the allowance for loan losses for the year ended December 31, 2010, and the recorded investment in allowance for loan losses and loans based on portfolio segment by impairment method as of December 31, 2010. Allocation of a portion of the allowance to one type of loans does not preclude its availability to absorb losses in other categories.

		As of December 31, 2010
						Other
		Construction/				Commercial Real				Residential				Commercial				Consumer
		Land Development				Estate				Real Estate				& Industrial				& Other				Unallocated				Total
		(In thousands)
Allowance for loan losses:
Beginning balance		$	9,624			$	13,568			$	11,348			$	6,067			$	1,984			$	377			$	42,968
Loans charged off			(1,113	)			(858	)			(3,550	)			(3,315	)			(1,983	)			—				(10,819	)
Recoveries of loans previously charged off			55				851				416				39				424				—				1,785
Net loans recovered (charged off)			(1,058	)			(7	)			(3,134	)			(3,276	)			(1,559	)			—				(9,034	)
Provision for loan losses			2,343				424				5,666				902				807				(292	)			9,850
Balance, September 30			10,909				13,985				13,880				3,693				1,232				85				43,784
Loans charged off			(9,161	)			(15,847	)			(7,181	)			(20,912	)			(533	)			—				(53,634	)
Recoveries of loans previously charged off			—				17				76				11				94				—				198
Net loans recovered (charged off)			(9,161	)			(15,830	)			(7,105	)			(20,901	)			(439	)			—				(53,436	)
Provision for loan losses			10,254				19,092				7,522				23,565				229				2,338				63,000
Balance, end of year		$	12,002			$	17,247			$	14,297			$	6,357			$	1,022			$	2,423			$	53,348
Period end amount allocated to:
Loans individually evaluated for impairment		$	7,602			$	9,912			$	9,843			$	2,625			$	438			$	—			$	30,420
Loans collectively evaluated for impairment			4,400				7,335				4,454				3,732				584				2,423				22,928
Balance, end of year		$	12,002			$	17,247			$	14,297			$	6,357			$	1,022			$	2,423			$	53,348
Loans receivable:
Period end amount allocated to:
Loans individually evaluated for impairment		$	25,556			$	69,010			$	35,077			$	16,939			$	1,136			$	—			$	147,718
Loans collectively evaluated for impairment			323,212				763,423				395,623				167,075				95,323				—				1,744,656
Balance, end of year		$	348,768			$	832,433			$	430,700			$	184,014			$	96,459			$	—			$	1,892,374